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VCE ECONOMICS UNITS 1 AND 2

• Mohan Dhall •

All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of Science Press. ABN 98 000 073 861

© Science Press 2018First published 2018

Science PressPrivate Bag 7023 Marrickville NSW 1475 AustraliaTel: +61 2 9516 1122 Fax: +61 2 9550 [email protected] www.sciencepress.com.au

Contents

Words to Watch iv

Introduction v

Dot Points

Unit 1 The Behaviour of Consumers and Businesses vi

Unit 2 Contemporary Economic Issues viii

Questions

Unit 1 The Behaviour of Consumers and Businesses 1

Unit 2 Contemporary Economic Issues 101

Answers

Unit 1 The Behaviour of Consumers and Businesses 212

Unit 2 Contemporary Economic Issues 234

Appendix

Index 259

Dot Point VCE Economics Units 1 and 2 iii

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Contents

account, account for State reasons for, report on,

give an account of, narrate a series of events or

transactions.

analyse Interpret data to reach conclusions.

annotate Add brief notes to a diagram or graph.

apply Put to use in a particular situation.

assess Make a judgement about the value of

something.

calculate Find a numerical answer.

clarify Make clear or plain.

classify Arrange into classes, groups or categories.

comment Give a judgement based on a given

statement or result of a calculation.

compare Estimate, measure or note how things are

similar or different.

construct Represent or develop in graphical form.

contrast Show how things are different or opposite.

create Originate or bring into existence.

deduce Reach a conclusion from given information.

define Give the precise meaning of a word, phrase or

physical quantity.

demonstrate Show by example.

derive Manipulate a mathematical relationship(s) to

give a new equation or relationship.

describe Give a detailed account.

design Produce a plan, simulation or model.

determine Find the only possible answer.

discuss Talk or write about a topic, taking into account

different issues or ideas.

distinguish Give differences between two or more

different items.

draw Represent by means of pencil lines.

estimate Find an approximate value for an unknown

quantity.

evaluate Assess the implications and limitations.

examine Inquire into.

explain Make something clear or easy to understand.

extract Choose relevant and/or appropriate details.

extrapolate Infer from what is known.

hypothesise Suggest an explanation for a group of facts or phenomena.

identify Recognise and name.

interpret Draw meaning from.

investigate Plan, inquire into and draw conclusions about.

justify Support an argument or conclusion.

label Add labels to a diagram.

list Give a sequence of names or other brief answers.

measure Find a value for a quantity.

outline Give a brief account or summary.

plan Use strategies to develop a series of steps or processes.

predict Give an expected result.

propose Put forward a plan or suggestion for consideration or action.

recall Present remembered ideas, facts or experiences.

relate Tell or report about happenings, events or circumstances.

represent Use words, images or symbols to convey meaning.

select Choose in preference to another or others.

sequence Arrange in order.

show Give the steps in a calculation or derivation.

sketch Make a quick, rough drawing of something.

solve Work out the answer to a problem.

state Give a specific name, value or other brief answer.

suggest Put forward an idea for consideration.

summarise Give a brief statement of the main points.

synthesise Combine various elements to make a whole.

Words to Watch

Dot Point VCE Economics Units 1 and 2iv

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Words to Watch

What the book includes

This book provides questions and answers for each dot point in the Victorian Certificate of Education Study Design for each core topic in the Year 11 Economics syllabus:

Unit 1 The Behaviour of Consumers and Businesses

• Area of Study 1 Thinking Like an Economist

• Area of Study 2 Decision Making in Markets

Unit 2 Contemporary Economic Issues

• Area of Study 1 Economic Growth, Long Term Economic Prosperity and Environmental Sustainability

• Area of Study 2 Economic Efficiency and Equity

• Area of Study 3 Global Economic Issues

Format of the book

The book has been formatted in the following way:

1.1 Subtopic from syllabus.

1.1.1 Assessment statement from syllabus.

1.1.1.1 First question for this assessment statement.

1.1.1.2 Second question for this assessment statement.

The number of lines provided for each answer gives an indication of how many marks the question might be worth in an examination. As a rough rule, every two lines of answer might be worth 1 mark.

How to use the book

Completing all questions will provide you with a summary of all the work you need to know from the syllabus. You may have done work in addition to this with your teacher as extension work. Obviously this is not covered, but you may need to know this additional work for your school exams.

When working through the questions, write the answers you have to look up in a different colour to those you know without having to research the work. This will provide you with a quick reference for work needing further revision.

Introduction

Dot Point VCE Economics Units 1 and 2 v

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Introduction

Area of Study 1 Thinking Like an Economist

1.1 Introductory concepts 5

1.1.1 The basic economic problem of 5 relative scarcity and the need for economic decision making.

1.1.2 The concept and applications of 6 opportunity cost.

1.1.3 Resources used to meet needs 7 and wants: natural resources, labour and capital.

1.1.4 The meaning and significance of 9 positive and normative economics.

1.1.5 The purpose of economic activity 11 and the influence on material and non-material living standards.

1.1.6 The three basic economic 13 questions: ‘What and how much to produce?’, ‘How to produce?’, ‘For whom to produce?’

1.1.7 The need for trade-offs such as 15 current versus future, short run versus long run, and cost-benefit analyses.

1.1.8 The production possibility model 17 to illustrate the concepts of scarcity, choice, opportunity cost, underutilisation of resources and efficiency.

1.1.9 The two sector circular flow 21 model of the economy.

1.2 Consumers 24

1.2.1 The traditional economic 24 viewpoint of consumer behaviour such as rationality, ordered preferences, informed decision making and marginal benefits from consumption.

1.2.2 Economic factors that may 27 influence economic decisions made by consumers such as: utility maximisation; budget constraints; internal influences on economic decision making, for example personality types, ethics, habit; external influences on economic decision making, for example culture, marketing, and government.

1.2.3 Developments in research 36 about consumer behaviour, including the contribution of behavioural economics.

1.2.4 The ways consumers and 40 workers might respond to positive and negative incentives.

1.2.5 The effects of technological 43 change on consumer behaviour.

1.3 Business 45

1.3.1 The traditional economic 45 viewpoint of business in the economy: profit maximisation.

1.3.2 How businesses might respond 46 to positive and negative incentives.

1.3.3 The evolution of business 48 and changing goals such as sustainability, community involvement, gender equality, innovation, research and development.

1.3.4 The effect of technology on 53 business behaviour and the trade in goods and services.

1.3.5 The nature and effectiveness 56 of strategies businesses may use to increase profitability including price discrimination, multiple branding and illegal, anti-competitive behaviour as outlined in the Australian Competition and Consumer Act 2010.


Dot Point Page Dot Point Page

Dot Point VCE Economics Units 1 and 2viDot Points

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Area of Study 2 Decision Making in Markets

2.1 Key knowledge 71

2.1.1 The assumptions of a perfectly 71 competitive market system.

2.1.2 The law of demand and the 73 demand curve.

2.1.3 The way non-price factors such 76 as changes in disposable income, the prices of substitutes and complements, preferences and tastes, interest rates, changes in population, consumer sentiment and government intervention, affect demand and the position of the demand curve.

2.1.4 The distinction between a 79 movement along the demand curve and a shift of the demand curve.

2.1.5 The law of supply and the 84 supply curve.

2.1.6 The way non-price factors 87 such as changes in the cost of production, technological change, productivity growth, climatic conditions and government intervention affect supply and the position of the supply curve.

2.1.7 The distinction between a 89 movement along the supply curve and a shift of the supply curve.

2.1.8 Effects of changes in demand 93 and supply on equilibrium prices and quantities.

2.1.9 The role of relative prices in 96 the allocation of resources in a market based economy.

2.1.10 The degree of market power in 98 different markets such as perfect competition, monopolistic competition, oligopoly and monopoly, and the effect on prices, resource allocation and living standards.

Answers to The Behaviour of Consumers 212 and Businesses



Dot Point VCE Economics Units 1 and 2 vii Dot Points

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Area of Study 1 Economic Growth, Long Term Economic Prosperity and Environmental Sustainability


1.1.1 The nature and meaning of 105 trade-offs in economics.

1.1.2 Aggregate demand and its 107 components.

1.1.3 Aggregate supply. 111

1.1.4 The meaning and measurement 116 of economic growth using real gross domestic product (GDP) and real GDP per capita.

1.1.5 The economic benefits of 121 economic growth such as growth in material living standards, employment opportunities, economic development and non-material living standards.

1.1.6 The limitations associated 124 with using GDP per capita to measure changes in living standards.

1.1.7 Aggregate demand and 125 aggregate supply factors that may influence economic growth.

1.1.8 Factors that might affect 127 future rates of economic growth such as an ageing population and labour force participation.

1.1.9 Government economic policy 130 responses designed to influence the rate of economic growth such as budgetary policy, monetary policy and aggregate supply policies.

1.1.10 The meaning of both long term 135 economic prosperity and environmental sustainability.

1.1.11 Economic and environmental 136 costs of economic growth such as climate change, depletion of natural resources and deterioration of common access resources.

1.1.12 Trade-offs and compatibility 139 between economic growth and environmental sustainability

1.1.13 Alternative economic indicators 142 of living standards.

1.1.14 The effect of policy response 145 used to address environmental effects of economic growth such as market based approaches, direct actions and regulation.

Area of Study 2 Economic Efficiency and Equity


2.1.1 The difference between equity 153 in the distribution of income and equality in the distribution of income.

2.1.2 Income: earned and unearned 154 income, transfer income, gross income, disposable income, nominal and real income and social wage income.

2.1.3 Measures of income inequality 157 and poverty such as the Lorenz curve, Gini coefficient and Henderson Poverty Lines.

2.1.4 The difference between absolute 162 and relative poverty.

2.1.5 Causes of income inequality 163 and poverty in Australia and one other nation, such as unequal ownership of factors of production, relative levels of labour demand and labour supply, unemployment, lack of human capital and sovereign indebtedness.



Dot Point VCE Economics Units 1 and 2viiiDot Points

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2.1.6 The effect of poverty on material 166 and non-material living standards.

2.1.7 The meaning of economic 167 efficiency and the benefits of achieving allocative and technical efficiency.

2.1.8 Economic costs and benefits, and 169 social costs and benefits of achieving equity in the distribution of income.

2.1.9 Compatibility and conflict between 172 the goals of equity in the distribution of income and efficiency of resource allocation.

2.1.10 The role of markets in the 173 achievement of equity in the distribution of income and the efficiency of resource allocation.

2.1.11 Budgetary policy decisions on 174 the achievement of equity in the distribution of income and the efficient allocation of resources, such as progressive, proportional and regressive taxes, unemployment benefits and subsidisation of merit goods.

Area of Study 3 Global Economic Issues

3.1 The global economic issues for 179 investigation

3.1.1 The challenges faced by 179 developing nations in improving living standards and alleviating poverty.

3.1.2 Free trade versus protectionism. 182

3.1.3 The effect of globalisation on 188 relevant stakeholders.

3.1.4 The effect of government 192 policy, foreign aid, multilateral development assistance and foreign investment on developing nations.

3.1.5 The global distribution of income: 196 causes and implications of global inequality.

3.1.6 The effect of population movement 199 on labour markets, economic growth and the environment.

3.1.7 International responses to an 201 environmental challenge.

3.2 Selected global economic issue – 204 Environmental protection

3.2.1 Definition of the selected global 204 economic issue.

3.2.2 Economic reasons why the issue 205 may be of importance to Australia and the global economy.

3.2.3 Economic factors that might 206 influence the extent and nature of the selected global economic issue.

3.2.4 The different perspectives held 207 by stakeholders regarding the selected global economic issue, such as the role of consumers, businesses, governments and other relevant stakeholders.

3.2.5 The effects associated with 208 any action taken by relevant stakeholders to address the global economic issue.

Answers to Contemporary Economic Issues 234



Dot Point VCE Economics Units 1 and 2 ix Dot Points

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Dot Point VCE Economics Units 1 and 2xDot Points

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Notes

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DOT POINT

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The Behaviour of Consumers and Businesses

1 Unit 1 The Behaviour of Consumers and Businesses

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Dot Point VCE Economics Units 1 and 2

Unit 1

2Unit 1 The Behaviour of Consumers and Businesses

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Economics is a dynamic and constantly evolving field. As a social science, economics is interested in the way humans behave and the decisions made to meet the needs and wants of society. In this unit you will explore their role in the economy, how they interact with businesses and the way economic models and theories have been developed to explain the causes and effects of human action.

You will investigate some fundamental economic concepts. You will examine basic economic models where consumers and businesses engage in mutually beneficial transactions and investigate the motivations and consequences of both consumer and business behaviour. You will examine how individuals might respond to incentives and how technology may have altered the way businesses and consumers interact. You are encouraged to investigate contemporary examples and case studies to enhance your understanding of the introductory economic concepts.

You will examine a simple microeconomic model to explain changes in prices and quantities traded. Through close examination of one or more key markets you will gain insight into the factors that may affect the way resources are allocated in an economy and how market power can affect efficiency and living standards.

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Thinking Like an Economist

DOT POINT


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AREA OF STUDY 1

Area of Study 1 Thinking Like an Economist

Economics has an effect on everyone, irrespective of background. In this area of study you will begin to appreciate the contributions of economics as a discipline and investigate some of the factors that motivate people to act in the way they do and the consequences of their actions.

Every country is essentially faced with the same economic problem. How are resources going to be allocated to meet the needs and wants of its people? You will investigate the key economic questions of what and how much to produce, how to produce and who gets to enjoy the benefits of what is produced. You will consider the reasons why people might respond differently to incentives and how this can affect living standards. You are introduced to some of the tools that economists have developed to help them solve economic problems and apply them to contemporary economic issues.

Outcome 1

On completion of this unit you should be able to describe the basic economic problem, discuss the role of consumers and businesses in the economy and analyse the factors that influence decision making.

To achieve this outcome you will draw on key knowledge and key skills outlined in Area of Study 1.


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1.1 Introductory concepts.

1.1.1 The basic economic problem of relative scarcity and the need for economic decision making.

1.1.1.1 Define scarcity.

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1.1.1.2 Explain the problem with unlimited wants.

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1.1.1.3 Distinguish between renewable and non-renewable resources.

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1.1.1.4 How does scarcity affect non-renewable resources?

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1.1.1.5 How does the problem of scarcity affect renewable resources?

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1.1.1.6 Define sustainability.

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1.1.1.7 Explain how economic decision making must balance the problem of scarcity with demand.

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1.1.1.8 Outline the profit maximisation goals of the firm and what this implies for resource use.

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1.1.1.9 How can firms maximise growth and pursue profits whilst using resources sustainably?

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1.1.2 The concept and applications of opportunity cost.

Use the following information which relates to OppLand to answer the next SIX questions.

Tonnes of wheatharvested (000s)

4000

8000

Production in OppLand

Number of cars

Productionpossibilitiesfrontier, PPF

1.1.2.1 Define opportunity cost.

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1.1.2.2 In the diagram above, how much wheat can be produced in OppLand?

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1.1.2.3 Using the above diagram, how many cars can be produced in OppLand?

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1.1.2.4 Suppose that the economy in OppLand produced 3000 cars. At this point how much wheat can also be produced?

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1.1.2.5 Determine the opportunity cost in OppLand of producing 3000 cars.

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1.1.2.6 How does the slope of the production possibilities curve relate to opportunity cost?

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1.1.3 Resources used to meet needs and wants: natural resources, labour and capital.

1.1.3.1 Distinguish between wants and needs.

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1.1.3.2 How do economic decisions differ with respect to wants and needs?

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1.1.3.3 What are factors of production?

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1.1.3.4 Define natural resources.

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1.1.3.5 How do firms utilise natural resources?

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1.1.3.6 Define value adding.

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1.1.3.7 What is labour?

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1.1.3.8 Explain how labour is utilised by firms.

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1.1.3.9 Define capital.

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1.1.3.10 What does ‘produced means of production’ mean?

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1.1.3.11 Distinguish between human capital and other forms of capital, such as social capital.

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1.1.3.12 What is capital-labour substitution?

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1.1.3.13 Why might businesses substitute labour with capital?

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1.1.3.14 Describe the benefits of using capital in the form of machinery and technology.

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1.1.4 The meaning and significance of positive and normative economics.

Positive economicsMeasurable, factual, objective,

rational, quantitative, evidence based, free of judgement or opinion.

An example is, ‘when the government pays social benefits this is money that cannot be allocated for infrastructure’.

Normative economicsSubjective, value judgements,

qualitative, based on a social stance or perception about value.

An example is, ‘the government should pay all people a minimum wage’.

1.1.4.1 Distinguish between positive and normative economics.

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1.1.4.2 Define rational decision making and outline its importance to economic decision making.

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1.1.4.3 What is the purpose of economic statistics?

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1.1.4.4 What do the following economic statistics measure?

Gross domestic product (GDP)

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Unemployment rate (%)

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Marginal tax rate

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Cash rate

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1.1.4.5 How do economic statistics benefit economic decision making?

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1.1.4.6 Who controls the largest economic decisions in society?

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1.1.4.7 How are governments affected by normative economics?

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1.1.4.8 Use the information below and your own knowledge to answer the questions that follow.

Statement 1: ‘A loaf of bread should not cost more than $2’.

Statement 2: ‘If there is a tax imposed on carbon production then manufacturers will switch to less carbon producing methods of production’.

(a) What values are reflected in statement 1?

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(b) What economic fact is implied in statement 2?

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1.1.4.9 Why are both positive and normative approaches to economics important when understanding economic decision making?

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1.1.5 The purpose of economic activity and the influence on material and non-material living standards.

Economic objectives

• Economic growth (prosperity)

• Quality of life

• Employment

• Economic stability and certainty in markets

• Income equality

• International confidence

• Environmental sustainability

1.1.5.1 State seven economic goals.

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1.1.5.2 What is economic activity?

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1.1.5.3 Define economic growth.

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1.1.5.4 What are living standards?

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1.1.5.5 How do economic decisions affect standards of living?

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1.1.5.6 Distinguish between the terms ‘material’ and ‘non-material’, referring to two examples of each.

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1.1.5.7 Use the information below and your own knowledge to distinguish between material and non-material standards of living.

Column 1 Measures of material wealth

Column 2 Measures of non-material (quality of life) factors

Gross domestic product per capita Life expectancy at birth (years)

Average national wage Mean years of schooling (years)

Household consumption Adult literacy ratio

Household income Political stability

Net wealth: Household assets – household debts Environmental quality

Availability of employment Perceptions about corruption levels

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1.1.5.8 How are material and non-material living standards related?

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1.1.5.9 How does economic activity affect material living standards?

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1.1.5.10 How does economic activity affect non-material living standards?

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1.1.6 The three basic economic questions: ‘What and how much to produce?’, ‘How to produce?’, ‘For whom to produce?’

The three basic economic questions • What and how much to produce? • How to produce? • For whom to produce?

Additional economic question • (How to distribute?)

Decided by government • Centralised • ‘Command’ economies • Highly regulated and controlled

Decided by markets • Decentralised • Market based • Little to no regulation

Mixed market economy • Some aspects centralised • A mix of government control and market forces • Deregulation and competition subject to competition rules

1.1.6.1 What are public goods?

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1.1.6.2 What are private goods?

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1.1.6.3 Distinguish between a command economy and a totally market based economy.

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1.1.6.4 How does a command economy address the basic economic questions?

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1.1.6.5 How does a market based economy address the basic economic questions?

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1.1.6.6 What role does regulation play in a mixed market economy?

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1.1.6.7 Define deregulation.

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1.1.6.8 Why do economies deregulate over time?

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1.1.6.9 What effect does regulation have on a market based economy?

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1.1.6.10 From a consumer and labour perspective, why would a purely market based economy not be suitable?

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1.1.7 The need for trade-offs such as current versus future, short run versus long run, and cost-benefit analyses.

1.1.7.1 Define the following terms.

Current

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Short run

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Long run

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Cost

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Benefit

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1.1.7.2 Distinguish between capital and consumption.

Capital

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Consumption

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1.1.7.3 How does current spending affect future consumption?

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1.1.7.4 Distinguish between short run and long run economic decisions with respect to fixed and variable factors.

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1.1.7.5 What does ‘time lag’ mean?

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1.1.7.6 How are production decisions affected by short run and long run factors?

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1.1.7.7 Explain the importance of assessing costs and benefits when making rational economic decisions.

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1.1.7.8 Define infrastructure.

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1.1.7.9 Why do governments sometimes have to sacrifice immediate benefits for future benefits?

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1.1.8 The production possibility model to illustrate the concepts of scarcity, choice, opportunity cost, underutilisation of resources and efficiency.


Production possibility

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Scarcity

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Choice

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Opportunity cost

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Trade-off

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Underutilisation

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Efficiency

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1.1.8.2 What does the production possibility model show?

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1.1.8.3 Provide another name for the production possibilities curve.

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1.1.8.4 Identify one assumption made in the production possibilities frontier.

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Use the information below and your own knowledge to answer the next FIVE questions.

Production possibilities frontier for Maikland

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Smart phones

Motor vehicles

Point A

Point B

1 million

11 000

1.1.8.5 What two products can be made in the economy of Maikland as shown?

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1.1.8.6 What does point A represent?

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1.1.8.7 What does point B indicate on the graph?

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1.1.8.8 Explain the term specialisation.

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1.1.8.9 Why might Maikland specialise in the production of smart phones instead of motor vehicles?

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Use the information below and your own knowledge to answer the next FIVE questions.

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Smart phones

Motor vehicles

Point A

Point C2 million

5500

1.1.8.10 Estimate production at point A.

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1.1.8.11 Define underemployment, with reference to the term underutilisation.

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1.1.8.12 What does the shift from A to C represent?

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1.1.8.13 How does a move from A to C occur in an economy?

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1.1.8.14 Why is C always preferred to A?

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Use the information below and your own knowledge to answer the next FOUR questions.

Smart phones

Motor vehicles

General outward movement

Proportionally greater movement

1.1.8.15 What would create a general outward movement of the production possibilities frontier?

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1.1.8.16 Why is an outward movement of the production possibilities curve an economic goal?

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1.1.8.17 Describe the importance of the relatively greater shift along the axis titled ‘Motor vehicles’.

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1.1.8.18 Explain the importance of innovation and the discovery of new resources to movements in the production possibilities frontier.

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1.1.9 The two sector circular flow model of the economy.

Consumers(households)

Business(firms)

A

B

C

D


Consumers

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Households

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Closed economy

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Equilibrium

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1.1.9.2 What is the two sector circular flow model of the economy?

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1.1.9.3 In the diagram above, what do the following letters represent?

A

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C

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1.1.9.4 Define wages, with reference to income (Y).

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1.1.9.5 Explain how household expenditure (E) on goods and services is equal to income earned by households.

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1.1.9.6 Describe the relationship between output, O and income, Y in the two sector model.

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1.1.9.7 Explain why this equation holds true in the two sector circular flow model of the economy: Y = E = O.

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1.1.9.8 Identify three assumptions of the two sector circular flow model of the economy.

Assumption 1

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Assumption 2

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Assumption 3

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1.1.9.9 Identify three limitations of the two sector circular flow model of the economy.

Limitation 1

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Limitation 2

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Limitation 3

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DOT POINT

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211 Answers

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Answers


1.1.1.1 Scarcity is the concept that resources are finite (limited) and that this limitation affects economic decision making.

1.1.1.2 The problem with unlimited wants is that people desire more and more and this places pressure on limited resources.

1.1.1.3 Renewable resources are those that if well managed can be replenished when used sustainably whereas non-renewable resources are those that once used can never be replenished.

1.1.1.4 Scarcity affects non-renewable resources for as they are utilised such resources become increasingly scarce – that is, less is available for consumption. This means new sources of these finite resources need to be discovered or better ways of using them need to be utilised and frequently the price of the finite resource increases.

1.1.1.5 Scarcity affects renewable resources in that it indicates a need for the sustainable use of such resources. Careful management of renewables should mean that future generations can have the same access to such resources as the present generations do.

1.1.1.6 Sustainability is the ability to maintain current consumption of a resource that does not compromise the consumption of future generations.

1.1.1.7 Economic decision making involves understanding the tensions between scarcity and the pressure that results from unlimited wants (demand). Consumption should be balanced against conservation.

1.1.1.8 Firms are assumed to focus on profit maximisation. This means that as much as possible is made and sold (‘produced’) to maximise profit. This involves use of resources that can be mismanaged, wasted and overused in the pursuit of profits.

1.1.1.9 It is difficult for firms to maximise growth and pursue profits while also using resources sustainably. Businesses will need to identify how resources can be effectively utilised, minimising waste and, as far as possible, using renewable resources sustainably. This can be done by focusing on innovation and using best practice. The use of technology can help minimise resource use and maximise productivity, thus conserving resources and maximising profits.

1.1.2.1 Opportunity cost means the loss of other alternatives when one alternative is chosen. The alternatives in this example are wheat and cars.

1.1.2.2 If OppLand only produced wheat it could produce 8 000 000 tonnes.

1.1.2.3 If OppLand only produced cars it could produce 4000 cars.

1.1.2.4 To make 3000 cars then 2 000 000 tonnes of wheat could also be produced in OppLand.

1.1.2.5 The opportunity cost of producing 3000 cars is the 6 000 000 tonnes of wheat foregone in order to produce the cars.

1.1.2.6 The slope of the production possibilities curve indicates the opportunity cost at each point of production.

1.1.3.1 Wants are the things that people desire whereas needs are the things people cannot live without and are necessary for survival.

1.1.3.2 The economic decisions made with respect to wants and needs differ as follows: the fulfilment of needs is necessary and governments must support people to have their basic needs met, whereas economic decisions made about wants relate to how governments can support people to have choice and discretionary spending.

1.1.3.3 Factors of production are the inputs used in making goods and services. They include land (a reference to the range of natural resources), labour (intellectual and physical human effort), capital (machinery, buildings and technology used to help to produce goods and services) and enterprise (or entrepreneurship – the capacity for a person to harness the other factors of production to produce goods and services that can be sold for a profit).

1.1.3.4 Natural resources are those things that occur naturally and act as fundamental inputs or raw materials in production. These include resources such as water, land, soils, wind, solar energy, the produce from agriculture, mining (gas, oil, coal, gems, ores, minerals, elements) fishing and forestry.

1.1.3.5 Firms utilise natural resources as necessary inputs for the making of goods and services. The resources are transformed into value added goods and services for sale in final (consumer) markets.

1.1.3.6 Value adding means that energy and processes have been used to change raw materials into useful goods and services.

1.1.3.7 Labour refers to human effort in the form of physical and intellectual work.

1.1.3.8 Labour or human effort is utilised by firms to assist in the production of goods and services.

1.1.3.9 Capital is sometimes called ‘the produced means of production’ and refers to machinery, factories and buildings that enable the production of goods and services.

1.1.3.10 Produced means of production means that capital is created by people and assists in the creation of goods and services.

1.1.3.11 There are various forms of capital, such as human capital, social capital and intellectual capital. Human capital refers to the level of skills and education that characterise a population and that can be meaningfully utilised. Social capital refers to the social networks and awareness people have that can be utilised productively. Intellectual capital refers to the depth of knowledge within a population, e.g. the employees of a particular company, that can be utilised to maximise production.

1.1.3.12 Capital-labour substitution refers to the replacement of people by machinery. Typically capital-labour substitution occurs in areas where there is unskilled repetitive, manual work that machines can replicate, but do faster, with fewer errors, more consistency and at lower cost per unit of production.

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1.1.3.13 Businesses may substitute capital for labour because machines, though more expensive initially, can work for longer periods and can reduce production time, wastage and running costs while ensuring production is of consistent quality.

1.1.3.14 Capital in the form of machinery and technology enables a business to produce a speed and scale not possible with human labour. Also, machinery does not tire and thus become unproductive over the length of a shift. Machines can also be programmed to minimise waste and ensure consistent standards of quality.

1.1.4.1 Positive economics is based on facts and evidence supported by data (that is, is quantified) and is free of subjectivity or opinion. Normative economics is subjective and based on value judgements.

1.1.4.2 Rational decision making refers to economic decisions made by individuals based on logic and with a view to maximising personal satisfaction and self-interest at the lowest possible cost and risk.

1.1.4.3 Economic statistics are quantitative (numerical) measures of various economic variables. They are used to assess the effectiveness of economic decisions.

1.1.4.4 Gross domestic product (GDP) measures the total value of goods and services produced within an economy in a year. Unemployment rate (%) measures the proportion of people who are not employed but are actively seeking work compared to the total labour market size (those employed and those not employed but actively seeking work). Marginal tax rate measures the proportion of tax taken by the government on the last dollar earned. Cash rate measures the lending rate levied on the banks when they borrow from the central bank (in Australia’s case, the Reserve Bank of Australia, RBA).

1.1.4.5 Economic statistics benefit economic decision making by helping decision makers use an evidence based approach to economic policy, as opposed to an ideological approach.

1.1.4.6 Major economic decisions in most societies are made by the official government of a nation. However, significant economic decisions can also be made by large corporations (TNCs) that have large market share, earn billions of dollars and employ tens of thousands of people.

1.1.4.7 Normative economics is based on subjectivity, opinion and value judgements. Since many opinions seem to be fair, valid and reasonable, people do not question the economic validity of the opinion. Thus, the statement, ‘multinationals should pay their fair share of tax’ is likely to be agreed with by everyone, but whether this is rational or likely to lead to the best economic decisions is debatable in a globalised world. These value judgements can affect the election chances of a government and the policies they present to the public. It also puts pressure on governments to fully explain decisions if they are likely to be judged as unfair.

1.1.4.8 (a) The value reflected by statement 1 is that all people should be able to access necessary and basic food without it being unaffordable even for those on the lowest incomes. This therefore values inclusion and an equitable distribution of necessary food.

(b) The economic fact implied in statement 2 is that costs imposed on production lead to higher prices. This in turn affects how much consumers can buy, so they will switch their preferences away from the higher priced goods to other cheaper goods. Hence pricing carbon will lead to changed buying behaviours, which would cause producers to change their production methods.

1.1.4.9 Both positive approaches to economics (based on objective, rational and quantifiable data or an evidence base) and normative approaches must be considered by economic decision makers. This is because people’s perceptions are what they base their decisions on, and if they believe certain things (regardless of validity) then they may well act on those things. In order to achieve a balance, economic decision makers need to consider a broad range of perspectives that accommodate the diversity of opinions.

1.1.5.1 Economic growth (prosperity), quality of life, employment, economic stability/certainty in markets, income equality, international confidence, environmental sustainability.

1.1.5.2 Economic activity is any activity with an economic dimension, e.g. activities related to the production, distribution and consumption of goods and services.

1.1.5.3 Economic growth refers to the increase in the amount of economic activity from one year to the next.

1.1.5.4 Living standards are a measure of the level to which basic needs are being met and, also the level of quality of life, choices available and material wealth of ‘average’ individuals.

1.1.5.5 National economic decisions directly affect living standards. Government decisions such as the type and amount of taxes, how it spends on infrastructure, and the amount it provides in welfare payments will directly affect the material living standards of people.

1.1.5.6 Material refers to tangible goods or products such as cars and watches. Non-material refers to intangibles such as access to clean air and fresh water.

1.1.5.7 Material and non-material living standards differ as follows: material standards include such things as GDP per capita (‘average national income per person’), average national wages, household consumption, household income, net wealth and availability of employment. All of these measures relate to income and material wealth. The non-material living standards include life expectancy, mean years of schooling, adult literacy ratio, political stability, environmental quality and perceptions about corruption all of which are quality of life factors.

1.1.5.8 There is a relationship between material and non-material living standards: as material wealth increases then the level of non-material standards of living tends to improve as well. Higher levels of income tend to lead to better quality of life outcomes.

1.1.5.9 The level of economic activity can directly impact on material living standards. Economic activity involves the creation of goods and services and the provision of employment. Thus, the higher the level of economic activity the higher the level of employment and incomes and the greater the impact on material living standards.

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1.1.5.10 Economic activity also impacts on non-material living standards and does so as follows: as economic activity increases and people experience employment and wages growth then living standards can start to improve. Also as national wealth increases as a result of economic activity, there can be investment in infrastructure and other areas of government spending that improve living standards.

1.1.6.1 Public goods are goods (or services) that are provided by the government or private institutions and are available for use by everyone. The use of the good (or service) is not exclusive, meaning they are non-rivalrous (the use by one individual does not prevent others accessing it) and non-excludable (individuals are not excluded from the use of that good).

1.1.6.2 Private goods are those that when privately consumed are not available for use by others – thus their use is excludable. As they are not free, private goods are also rivalrous, meaning that those willing and able to pay can have access to the good or service.

1.1.6.3 A command economy is one which is totally controlled by a centralised government, with all aspects regulated. By contrast a totally market based economy is one in which there are no government controls at all, and the market is solely subject to the interaction of demand and supply.

1.1.6.4 A command economy addresses the basic economic questions through the government response to the basic economic questions and making them law. That is, the government decides what can legally be made, how much is made, how production is done and how distribution is carried out.

1.1.6.5 A market based economy addresses the basic economic questions through the operations of market forces of supply and demand. That is, the market decides what is made and in what quantities, how things are produced and how they are distributed.

1.1.6.6 Regulation plays an important role in a mixed market economy. It helps to protect the vulnerable in order to equalise the power between producers and consumers. It also imposes minimum safety standards so that labour is protected and provides direction on pay rates, environmental protection, product safety and consumer protection. The effect is to increase business costs but it also creates greater certainty, safety and predictability in markets.

1.1.6.7 Deregulation is the reduction of regulation over time.

1.1.6.8 Economies deregulate when it is clear that regulation is not necessary to produce particular economic outcomes. Deregulation relaxes the rules imposed on markets and hence reduces cost and increases the level of competition between businesses.

1.1.6.9 Regulation imposed upon a market based economy would lead to an increase in cost and complexity within the market. Businesses would be forced to comply with new rules which would cause some structural and cost adjustments. The new regulations would lead to businesses having to comply in order to avoid penalty.

1.1.6.10 From a consumer and labour perspective economies operating purely on market forces are not safe or certain. This is because the cost of labour (wages) can be driven downwards leading to negative wage outcomes. Also, the health and safety of employees can also be reduced and job security is lessened. In terms of consumers, important protections would be lost and the saying, ‘caveat emptor’ (let the buyer beware) would apply. This is because the power in the market belongs with the sellers and this can lead to monopolies. Consumers and labour are more vulnerable to exploitation.

1.1.7.1 Current: In the present term. Future: Anticipated to occur later or after an elapsed period of time. Short run: A period of time in which there are fixed factors of production so that changes can only occur slowly and under constraint. Long run: A period of time in which there are no fixed factors of production. Cost: The amount of money given up, paid or used when making economic choices to obtain a return or benefit. Benefit: The amount of reward, return or financial gain received as a result of making economic choices.

1.1.7.2 Capital: Money in the form of machinery, equipment, technology and buildings that can be collectively used to produce goods and services. Consumption: The amount or volume of goods and services used up in the current period.

1.1.7.3 Current spending means that money is spent now instead of being invested in capital for future production. Thus, the more that is consumed in the present, the less that can be consumed in the future.

1.1.7.4 Short run: The period of time in which all factors are fixed and thus prices can only be changed by varying levels of production. In the short run there are barriers to entry that reduce competition. The effect is that economic decisions may be short term. Long run: The period of time in which all factors of production are variable as are costs. The effect this has on decision making is that businesses must innovate and anticipate and adjust to competition.

1.1.7.5 Time lag: a period of time that elapses between the implementation of an economic decision and the effects of the decision being realised in markets.

1.1.7.6 Production decisions can be significantly affected by short run and long run factors. In the short run firms are less likely to face the level of competition that will be experienced in the longer run when all factors of production are variable. So firms will make decisions to insulate themselves in the long run against risk and loss through investment and structural change. In the short run businesses make decisions about prices and labour levels but in the long run the decisions are about capital investment (including acquisition of technology) and production processes.

1.1.7.7 It is important for businesses to assess the financial costs and possible benefits when making rational economic decisions. This is because rational decision making means making decisions that create profits for the lowest possible cost or expenditure. It is therefore essential for businesses to quantify and assess the financial costs and benefits of various alternatives prior to making economic decisions.

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1.1.7.8 Infrastructure refers to the essential and fundamental facilities that enable production, such as roads and other forms of transportation modes, access to electricity/power and energy, telephony, internet access, running water and sewage treatment, bridges and ports.

1.1.7.9 Investment in essential infrastructure necessarily involves sacrificing immediate benefits and consumption in favour of future benefits and consumption. Governments therefore forego current spending in favour of investment in capital to ensure future consumption and benefits.

1.1.8.1 Production possibility: The amount that can be produced if the available factors are utilised to their capacity. Scarcity: The state of being in limited supply. Choice: The capacity to be able to decide between alternative options. Opportunity cost: The alternative a business did not choose when making an economic decision. Trade-off: The act of giving up or compromising a choice in order to make an alternative choice. Underutilisation: When a factor of production is not used to its potential or capacity. Efficiency: Using a resource with minimal wastage and with cost effectiveness.

1.1.8.2 The production possibility model shows the range of possible production outcomes for an economy. A production possibility frontier (PPF) or production possibility curve (PPC) is a graphical representation of possible combination of two goods with constant resources and technology. It is a graph representing production trade-offs of an economy given fixed resources.

1.1.8.3 Production possibilities frontier (ppf) is an alternative name.

1.1.8.4 One assumption made in the production possibilities frontier is that there are only two products or choices that are available within an economy.

1.1.8.5 Smart phones and motor vehicles.

1.1.8.6 Point A represents underutilisation or unemployment of resources.

1.1.8.7 Point B indicates a point where resources are fully utilised. At this point 1 million smart phones and 11 000 motor vehicles can be produced.

1.1.8.8 Specialisation means that an economy focuses on the production of only one good or service.

1.1.8.9 Maikland might specialise in the production of smart phones instead of motor vehicles because it might have an advantage over other nations in the production of these goods and therefore benefit most from specialisation and trade.

1.1.8.10 At point A about 1.7 million smart phones and 4000 motor vehicles can be produced.

1.1.8.11 Underemployment means that factors of production are not fully used and there is inefficiency in production. Underutilisation means that the economy is not working to capacity because there is underemployment or unemployment of resources.

1.1.8.12 A shift from A to C represents a shift to full production. This can be done when the factors of production are utilised fully and efficiently, without waste or underutilisation.

1.1.8.13 A move from A to C becomes possible when factors of production are effectively used. This can be done by ensuring labour is fully employed and factors of production are neither wasted nor idle. Effectively utilising the available production capacity comes about by keeping machinery well maintained, ensuring that work processes are productive and also through using machinery and equipment fully.

1.1.8.14 C is always preferred to point A as an economy is working to capacity. This means that there will be fully employed resources and the greatest level of production possible at that point in time. Underutilisation at A represents wasted resources and inefficiency.

1.1.8.15 A general outward movement in the production possibilities frontier represents an increase in overall national productive capacity. This could occur because of the discovery of new resources or because of a breakthrough in technology both of which create an increase in productive capacity.

1.1.8.16 The outward movement of the production possibilities curve represents an increase in economic growth as productive capacity rises. As economic growth is an economic goal, this is a desired economic outcome. With increased production comes increased economic activity, increased demand for labour and increased national wealth.

1.1.8.17 The relatively greater shift along the axis titled ‘Motor vehicles’ indicates that the increase in production of motor vehicles has come about because of a relatively greater productive capacity in this industry. This may indicate a technological development that enables improved production, with lower wastage and greater national output for this industry.

1.1.8.18 Innovation involves the creation of new technologies that can enhance productive capability. Also, the discovery of new resources indicates that new things can be made or there can be greater production of things already being made. Both innovation and the discovery of new resources therefore lead to increased productive output and move the production possibilities frontier outwards.

1.1.9.1 Consumers: Those who buy goods and services for households or personal use. Households: Comprising individuals and all family types, the household is the basic unit used to denote who consumes. Firms: Represent entities that engage in production of goods and services that are created for use in intermediate and consumer markets. Closed economy: This term is used to describe an economy that does not engage in any form of trade with other nations and is therefore self-sufficient. Equilibrium: In the two sector economy of households and firms equilibrium means aggregate expenditure is equal to total income.

1.1.9.2 The two sector circular flow model of the economy is a representation of a national economy that only includes households and firms (businesses). In this model households provide the land, labour, capital and enterprise and earn an income (in the form of rent, wages, interest and profit) and that income is totally spent on the goods and services produced by firms.

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